The lack of clarity on the subsidy sharing mechanism is discouraging and expected to weigh on the sentiments for these stocks

On Wednesday, a fire broke out at Bharat Petroleum Corp. Ltd’s (BPCL’s) Mumbai hydrocracker unit. The company’s shares fell 1% that day. The state-run oil marketing company informed BSE on Thursday that the fire incident would not have any material bearing on the firm’s overall operations/performance, based on its preliminary assessment. The stock recovered partially on Thursday.

Apart from that news, BPCL and Hindustan Petroleum Corp. Ltd (HPCL) both released their June quarter (Q1) numbers on Wednesday, which unfortunately for investors don’t move the needle meaningfully.

So far this fiscal year, shares of both firms have underperformed the benchmark Sensex by a wide margin. The bright side in this picture is that valuations are not demanding. HPCL and BPCL trade at 6.6 times and 8.5 times estimated earnings for FY19, respectively, based on Bloomberg data.

However, the good news ends there. Investors worry that these companies may not be able to take commensurate price hikes when global crude oil prices spike, as this is an election-heavy year. That kind of trend tends to hurt marketing margins of these companies.

As analysts from Jefferies India Pvt. Ltd point out, a bigger challenge may be from liquefied petroleum gas/ kerosene under-recoveries that are already on the rise after a benign June quarter. The government’s ₹ 20,800 crore FY19 budget provision is inadequate for the likely 80% year-on-year rise in under-recoveries to ₹ 46,000 crore making it likely that it leans on state-owned enterprises again to share the burden, added the brokerage firm. The lack of clarity on the subsidy sharing mechanism is discouraging and expected to weigh on the sentiments for these stocks.

Investors should also watch how refining margins shape up. Looking ahead, refining may fare better in the September quarter even if relaxed global demand-supply balances keep margins hemmed in for the year on average, says Jefferies India.

In short, there are few factors suggesting these stocks would outperform in the medium term.